Final answer:
A lower cost of capital indicates that a firm can finance its operations more cheaply, enhancing profitability and attractiveness to investors, thus leading to a higher total valuation.
Step-by-step explanation:
The question addresses the relationship between a firm's cost of capital and its total valuation. Specifically, it asks whether a lower cost of capital (ko) is associated with a higher total valuation of the firm. To answer this, we should consider several economic and financial principles. The cost of capital represents the rate of return required by investors to invest in the firm, and it includes the cost of debt and equity. Lower cost of capital implies that the firm is able to finance its operations and investments more cheaply, which enhances its profitability and therefore its attractiveness to investors.
Firms that are able to operate at or close to the bottom of the long-run average cost curve are able to minimize their costs over time, leading to higher efficiency and competitiveness in the market. High profitability indicated by a strong track record of earnings may result in a lower risk for lenders and investors, leading to a lower cost of capital. In addition, decreasing interest rates in the economy can lead to a lower cost of capital, as it reduces the expense associated with borrowing. All else being equal, a lower cost of capital increases the net present value of future cash flows, which in turn raises the firm's total valuation.